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1、6IncreasingReturnstoScaleandMonopolisticCompetition1.Explainhowincreasingreturnstoscaleinproductioncanbeabasisfortrade.Answer:Withincreasingreturnstoscale,countriesbeneÞtfromtradeduetothepo-tentialtoreducetheiraveragecostsbyexpandingtheiroutputsthroug
2、hsellinginalargermarket.2.Whyistradewithinacountrygreaterthantradebetweencountries?Answer:Bordereffectspreventtradebetweencountriesfrombeingaslargeaswithincountries.Thesefactorsincludetariffs,quotas,administrativerulesandregulations,andwhetherthecount
3、rieshaveacommonborderorlanguage.3.Startingfromthelong-runequilibriumwithouttradeinthemonopolisticcompeti-tionmodel,asillustratedinFigure6-5,considerwhathappenswhentheHomecountrybeginstradingwithtwootheridenticalcountries.Becausethecountriesareallthesa
4、me,thenumberofconsumersintheworldisthreetimeslargerthaninasin-glecountry,andthenumberofÞrmsintheworldisthreetimeslargerthaninasin-glecountry.a.Comparedwiththeno-tradeequilibrium,howmuchdoesindustrydemandDincrease?HowmuchdoesthenumberofÞrms(orproductva
5、rieties)increase?Therefore,doesthedemandcurveD/NAstillapplyaftertheopeningoftrade?Explainwhyorwhynot.Answer:Industrydemandincreasesbythreetimes,andthenumberofÞrmsalsoincreasesbythreetimes.Comparedwiththeno-tradeequilibrium,thedemandcurveD/NAdoesnotcha
6、ngebecausebothtotalquantitydemandedandthenumberofÞrmstripled.b.Doesthed1curveshiftorpivotduetotheopeningoftrade?Explainwhyorwhynot.Answer:BecauseD/NAisunchanged,pointAisstillontheshort-rundemandcurvefacingeachÞrm(d2inFigure6-6).However,thedemandcurvef
7、acedbyS-49S-50Solutions■Chapter6IncreasingReturnstoScaleandMonopolisticCompetitioneachÞrmbecomesmoreelasticduetotheincreaseinthenumberofÞrms:d1pivotstobecomeßatter.c.Compareyouranswerto(b)withthecaseinwhichHometradeswithonlyoneotheridenticalcountry.Sp
8、eciÞcally,comparetheelasticityofthedemandcurved1inthetwocases.Answer:Inthecasewiththreecountries,Homeconsumershavemorevarietiestochoosefromcomparedwiththetwo-countrycase.Forthatreason,thede-mandcurvefacingeachÞrmisßatter(moreelastic)whentherea
